For small business owners, direct and indirect overhead costs can significantly contribute towards lower profit margins.
Before reducing these costs however, it is useful to calculate exactly how much your overheads are costing you.
First you need to account for all indirect costs, which are costs that aren’t related to production of products or services. Then, take your sales for that period of time and divide overhead with them.
The equation is: (Overhead/Sales) x 100 = Overhead Percentage.
Have a look at the methods shared by William Schantz to lower these costs.
Hire an Accountant
This may seem like an unnecessary move that only adds to your existing costs but hiring an accountant can be very good for your business.
A professional accountant can effectively handle your business’s finances and this can lead to lower costs in the long-term.
An accountant usually results in less chance of making financial mistakes and better accuracy of sales and costs, which you would be hard-pressed to handle alone.
An added benefit of an accountant is to help you determine potential tax deductions, which can result in higher profit margins.
Find an Alternative Office Space
Big offices have a lot of rent to pay, which can add up to a significant amount.
It may be a smart move to evaluate your office space and find some ways to declutter it and make use of more space for employees.
According to William Schantz, It may even be smarter to consider alternative locations where rent is cheaper or find a smaller office that meets your business’ needs.
When changing office locations, it is important to find a place that doesn’t sacrifice your business’ revenue and employees’ productivity.
You could also consider letting some of your team members to work from home so you don’t have to accommodate a lot of people.
Don’t Pay Upfront
Sometimes, it may be important to not use self-funding to buy new equipment, which can be very expensive.
You can rent or lease machinery and other crucial items you might need instead of buying it upfront.
Another option is to buy equipment secondhand, from other similar companies in your industry.
Some costs will be there such as for periodic maintenance and repairs but you can save up on the main costs by settling for used items.
Reduce Amount of Employees
Employee wages contribute largely to the costs of running a business.
It may be a good option to trim down your team and keep only those who are absolutely crucial to the functioning of your business.
Make sure this doesn’t negatively affect morale since employees can feel expendable and therefore perform poorly.
Make smarter hiring decisions in the first place and employ those with a diverse skill set and higher potential.
Invest in training your employees properly to ensure a smooth functioning of your business’ internal processes.
A high percentage of overhead costs can mean you’re overlooking some key factors that are taking away unnecessarily from your profit margins.
A low percentage however can mean that you might be reducing quality for affordability. For more information, check out William Schantz's website.